Many investors buy gold producing companies to gain a leveraged exposure to movements in gold prices. The S&P/ASX All Ordinaries gold index increased just 38% over the three years to May 2011 while the US dollar gold price rose 73% and the Australian dollar gold price was up 55%.

“Among the 47 stocks within the Australian index, only 22 rose by more than the rise in the Australian dollar gold price,” said John Robertson, E.I.M. Capital Managers.  Only 19 rose by more than the rise in the US dollar gold price.

The stock prices of gold companies can perform poorly against movements in the physical gold price because:
gold stocks are exposed to equity market conditions which might be less buoyant

• operational risks can affect output adversely
• development risks can delay production starts
• the financial condition of the company may retard market valuations

All or some of these factors can detract from a company’s share price compared to the gold price.

“The range in stock returns can be enormous.  Over the three years to May 2011, the weakest performing gold stock in the index lost 79% while the strongest returned 1900%.  The largest and best known stock in the sector, Newcrest Mining, delivered a sub-par return of 25%.

“Investors seeking the leverage equity investments can deliver need to structure the gold segment of their portfolios to take account of the high probability that the share price of a gold producer, no matter how well known, could fall short of the gold price rise thy are seeking to capture,” said Mr Robertson.

E.I.M.’s Emerging Resources Company Share Fund has delivered an annualised rate of return after fees of 16.7% over the five years to 31 May 2011 putting it in 4^th place in the Morningstar rankings of over 2,000 retail investment trusts in Australia.

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“Our success comes from a focus on companies successfully executing growth strategies,” said John Robertson of E.I.M. Capital Managers.

“But from the beginning we also had a strong belief we were investing in a cyclical industry.  We expected to confront extreme volatility from time to time and positioned the portfolio to cope.

“We could not avoid the volatility in the market in 2008 and 2009 but our portfolio comprised stocks that could survive, recover and thrive,” said John Robertson.

In choosing stocks, E.I.M. searches for companies with the following characteristics:

• a resource base sufficient for long-life operations
• potential for growth
• a technically robust operational plan
• the necessary people and expertise
• a low cost structure

E.I.M. remains committed to the idea of having a portfolio positioned for volatility and continually stress tests its investment opportunities against the possibility of a major cyclical downturn.
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“We do not know when it will happen but history says we would be extraordinarily naïve to assume that after hundreds of years the cycles have suddenly disappeared,” said Mr Robertson

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